Australian small businesses facing insolvency may have redundancy pay obligations

A recent change to legislation, which took effect in December as part of the federal government’s ‘Closing Loopholes’ changes to the Fair Work Act, means small business employers – that is, employers of fewer than 15 employees – are required to pay redundancy pay in some situations where they are facing insolvency. Before this change took effect, Australian small business employers did not have any obligation to pay redundancy pay in any circumstances.

Under the new rules, a small business employer is required to pay redundancy pay if:

• at the time of the termination of employment of one or more employees, they are a small business employer;
• they are bankrupt or in liquidation;
• they are a small business employer because they terminated employment of one or more employees; and
• the termination of employment occurred because of the employer’s insolvency, or within six months of their becoming bankrupt or going into liquidation.

Small business employers may also be required to pay redundancy pay in situations where, if the first three of the above points are met, an IP is appointed to act on behalf of the business before the employer’s bankruptcy. In these situations, the employer is required to pay redundancy pay if the termination of employment occurred within six months of the date the last IP was appointed or – if more than one IP was appointed before the last IP and there was no gap between their appointments – within six months of the date the first IP was appointed.

What the change means for employers

Small business employers and their managers, including IPs, need to consider the employer’s insolvency history to determine if redundancy pay is owed to any retrenched employees.

In particular, small business employers will need to check when the business became a small business employer, and whether the business became a small business employer because of the dismissal of one or more employees due to insolvency.

In addition, small business employers and their managers need to establish whether they are bankrupt or in liquidation and, if so, how this occurred. They also need to check whether insolvency proceedings started within six months of the date of the employees’ retrenchment.

What the change means for insolvency practitioners

IPs who have been appointed to trading entities will need to carefully consider making adequate provision for redundancy pay if any termination of employment is anticipated on their appointment, noting that the previous small business employer exemption has fundamentally changed. 

Many small business operators, or IPs appointed to trading entities, may not have the time, resources or expertise to do these checks on their own. If not, they should get expert advice before retrenching employees. Getting it wrong could expose employers and individuals such as directors and senior managers to substantial penalties, including possible criminal liability, for breach of the Fair Work Act.